RBI tightens provisioning rules for restructured loans

BY Bruhadeeswaran R

The Reserve Bank of India has proposed a steep hike in the provisioning requirement for loan restructuring, raising it to 5% from April 1, against the current 2.75%.

The Reserve Bank of India has increased the provisioning norms on restructured standard accounts to 5 per cent from 2.75 per cent in a phased manner. By March, 2014, the commercial banks have to provide provisioning of 3.75 per cent and 5 per cent a year later.

The review comes on the back of the recommendation by working group setup by RBI under B Mahapatra committee..

In its new guidelines, a standard loan account would be immediately classified as sub-standard on restructuring, while the non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring.

However, leeway has be for a period of two years and further extension is provided in some cases of infrastructure project loans in view of the uncertainties involved in obtaining clearances from various authorities and importance of the sector in national growth and development.Further, banks have been advised to capture the diminution in fair value of restructured accounts as it will have a bearing not only on the provisioning required to be made by them but also on the amount of sacrifice required from the promoters.

No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package.

The RBI had set up a working group early in 2012 to review its guidelines on restructuring of loans by banks and financial institutions and suggest changes.

With economic growth in India slowing and some companies seeing pressure on their revenue and margins, there are rising concerns about the asset quality at India's banks.

India's GDP growth is on track for its worst year in a decade, and recently the RBI lowered its growth forecast for the fiscal year ending in March to 5.5 per cent from 5.8 per cent earlier.